17 October 2002 GST/HST Interpretation 41067 - Exempt Status of Spread Payable to Issuers of MBS

Dear XXXXX:

Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the spread payable to a Lender/Issuer of Canada Housing and Mortgage Corporation's NHA Mortgage-Backed Securities (MBS).

Statement of Facts

As described in the NHA MBS Program Guide (the Guide (All references to the Guide refer to The NHA Mortgage-Backed Securities Guide dated 2000-01-03.)), the Issuer participates in the MBS Program by issuing securities backed by NHA-insured mortgage loan pools. The securities certificates state that CMHC "guarantees the timely payment of principal and interest set forth in this instrument [i.e. the certificate] in accordance with the terms and conditions of that instrument." (The Guide, Appendix 1.)

By the terms of its agreement with CMHC, the Issuer will administer or cause to be administered the pooled mortgages. As payment for its services, the Issuer will be entitled to deduct and retain from the amount of interest accrued on the pooled mortgages a fee equal to the difference between the amount of interest accrued on the pooled mortgages and the amount of interest payable to the certificate holder (i.e., Investor) at the rate specified on the certificate. (Ibid.) This is referred to as the "spread".

The Issuer of mortgage-backed securities is responsible for certain losses, expenses and fees that are not usually the responsibility of a Servicer. Chapter 4 of the Guide outlines the risks and responsibilities of the Issuer.

Interpretation Requested

You are requesting confirmation that the position outlined in a technical interpretation dated XXXXX provided by CCRA (formerly Revenue Canada) to XXXXX is still valid. The interpretation stated that the spread received by the Lender/Issuer as described in the Guide is consideration for the provision of a "financial service" and is exempt from the GST.

Interpretation Given

Based on a review of the Guide, it is our opinion that the fee received by the Issuer, i.e., the "spread", is consideration for the provision of a financial service and is exempt from the GST/HST.

Explanation

Financial service is defined, in part, in subsection 123(1) of the Excise Tax Act (ETA) as "(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument" but does not include "(t) a prescribed service."

Subsection 4(1) of the Financial Services (GST/HST) Regulations defines a "person at risk" as "in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument."

Subsection 4(2) defines a prescribed service for purposes of paragraph (t) of the definition of "financial service", in part, as any administrative service, including an administrative service in relation to the payment or receipt of dividends, interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt.

Subsection 4(3) provides that a service referred to in subsection (2) is not a prescribed service for the purposes of paragraph (t) of the definition "financial service" in subsection 123(1) of the Act where the service is supplied with respect to an instrument by a person at risk.

As outlined in Chapter 4 of the Guide, the Issuer is financially at risk in respect of the mortgage-backed securities. Therefore, since the administrative services are supplied by a person at risk, i.e., the Issuer, the spread received by the Issuer as consideration for the servicing of the mortgage pool is consideration for a financial service and is exempt from GST/HST.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9577.

Yours truly,

Marilena Guerra
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate